Will the United-Continental Merger Raise Airfares?

Glenn Tilton (R), chairman, president and CEO of United Airlines, and Jeff Smisek, chairman, president and CEO of Continental Airlines.

If regulators approve the merger of United Airlines and Continental Airlines, it will create the world's largest carrier. Although it's early, many experts agree that there will probably be a push for higher fares.

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Mergers mean less competition, which generally leads to higher prices. "In the long run, I think it's fairly obvious that it's not incredibly wonderful for consumers," says Adam M. Pilarski, senior vice president at AVITAS, an aviation consulting firm. "It wasn't designed to be good for consumers. It was supposed to be good for the airlines."

Pilarski says that the merger makes sense for the two airline companies because it's the best way for them to become more profitable and hopefully more efficient. The result, he says, will likely be that the new company will charge consumers more in order to make more money.

Bob Mann, president of airline consulting firm R.W. Mann & Company, agrees that the merger would lead to higher prices for consumers, but thinks it will only apply to certain areas. Theoretically, he says, the new company's pricing power would be enhanced, but practically speaking, he says, there are many low-cost carriers that will continue to offer cheap flights. "From the standpoint of domestic travel consumers, it's unlikely that there would be substantial increases in pricing," Mann says. "The possibility [for price increases] does exist though in smaller domestic markets and international destinations where there isn't a lot of low-cost competition."

George Hobica of discount website Airfarewatchdog.com, wrote in a blog post Monday, "At least in the short term, fares are likely to rise, especially on routes with less competition and the 13 routes flown nonstop between the two airlines' hubs, such as Newark to Los Angeles, Cleveland to Chicago, Denver to Newark, Houston to Denver, and others." Hobica notes that low-cost carriers could expand their services in these areas.

Peter P. Belobaba, program manager for the Global Airline Industry Program at MIT, says consumers are missing the point. The airline industry, he says, is different from other industries because the number of competitors isn't the most significant driver of price increases.

"There were times during the 1990s when you had six, strong, big legacy carriers, and they were all very happily coexisting with not-so-low fares," Belobaba says. "Study after study has shown that the No. 1 explanatory variable determining the availability of outrageously low fares is the presence or absence of one of the so-called low-cost carriers." The low-cost carriers he is referring to include Southwest, JetBlue, and AirTran. Belobaba says a carrier only needs to make up 5 to 10 percent of the traffic in a particular market to be considered an effective competitor.

Belobaba says he believes consumers may have been spoiled in recent years. "It's kind of misleading to be talking about the fact that prices might go up for an industry that's lost $60 billion in the past 10 years," he says. "In some respects, maybe there has to be some realization on the part of consumers that it costs more to fly then what they've been paying. Some of the deals have been outrageously too good to be true for a while."

For patrons of either United or Continental, the merger creates a larger bank of frequent flier opportunities. "If you're a frequent flier program member, this is going the biggest one with the biggest networks hence the easiest one to earn miles," Mann says. United says customers will be able to use their miles for any flights on any other members of the Star Alliance network, which includes 26 airlines like Air China, Air Canada, and Lufthansa.

Consumers who have grown accustomed to cheap flights may have to realize that for the airline industry to exist, consolidation and price increase may be inevitable. "There's the prospect that this would stabilize the industry," Mann says. "That's probably good for consumers because the attraction of low fares is great, but on the other hand, the sustainability of the industry has been in question for about a decade."

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